Late last year, Beijing shifted its monetary policy tone, moving from "prudent" to "moderately loose" for the first time since the 2009 credit surge. This change sparked optimism that China was gearing up for bold steps to jumpstart its economy.

Back then, I argued that this pivot wouldn’t amount to much, given China’s deep-rooted structural issues and the mounting risks to its export sector from global trade tensions—not just with the U.S., but worldwide. Three months on, despite fleshed-out details from the National People’s Congress and a 16 March announcement unveiling a 30-point action plan—touted by analysts in the South China Morning Post as the most ambitious consumer-spending boost in 40 years—my view hasn’t shifted.

Before I explain why I see this stimulus delivering, at best, a modest short-term uptick, here’s a rundown of the key measures:

Consumer Spending: Same Old Story

These steps, however, fail to tackle the core reasons behind China’s stubbornly low consumption. Falling property prices have erased an estimated 25 trillion yuan ($3.4 trillion) in household wealth—about a third of yearly household income. Youth unemployment lingers above 10%, despite job-creation efforts. February’s Consumer Price Index dropped 0.7% year-on-year, while the producer price index fell 2.2%, marking 29 straight months of decline.

Even without these pressures, Michael Pettis, a China economy expert at Peking University, argues that no nation at China’s development stage has managed the consumption surge it now requires. In a December 2023 Carnegie Endowment report, he noted that China needs 6-7% annual consumption growth to sustain 4-5% GDP growth. Yet, in 2024, consumption grew by just 5%—down from an 8% average during the 1996-2022 Chemicals Supercycle. Pettis contends that achieving this would demand higher wages (hurting manufacturing edge), steeper business taxes (deterring investment), or a stronger currency (weakening exports)—all clashing with China’s wage-suppressing economic model.

Demographics: The Ultimate Long-Term Threat

Even if China stabilizes its economy temporarily, a far bigger challenge looms: its shrinking population. Kevin Swift, an ICIS economist, wrote on 30 August 2024 that the UN projects China’s population dropping to 1.26 billion by 2050 and 767 million by 2100—53 million and 134 million below prior estimates. Some demographers, like Yi Fuxian from the University of Wisconsin, suggest an even steeper fall, potentially to 1.10 billion by 2050 and 390 million by 2100, citing discrepancies in birth data and a fertility rate of just 0.8 (well below the 2.1 replacement level). This shrinking workforce and growing retiree pool will strain consumer-driven growth, mirroring Japan’s struggles with deflation and slow growth despite automation.

Trade Protectionism: Exports Under Fire

China’s export-led model faces rising global pushback. Pettis notes that while global investment averages 25% of GDP, China’s has consistently exceeded 40% for two decades. Sustaining this requires the world to slash its own investment share—a tough sell as countries resist China’s export dominance. Trade surpluses have ballooned—not just $49 billion with the U.S. since 2019, but $72 billion with the EU, $74 billion with Japan and Asia’s industrializing economies, and $240 billion elsewhere, per Brad Setser’s data. The Financial Times (6 December 2024) highlights China’s manufacturing supremacy, with a 35% share of global production by 2020—triple the U.S.’s—and a 20% slice of manufactured exports. Yet, as the Wall Street Journal (29 August) observes, China clings to low-end markets while targeting high-tech sectors like EVs and semiconductors, fueling trade tensions that could spike in 2025.

AI: Growth for Whom?

China’s AI sector is booming, with firms like DeepSeek sparking tech stock rallies and state-backed funds accelerating development. But this growth isn’t trickling down. Only 20% of Chinese adults (220 million) own stocks, compared to over 60% in the U.S. AI-driven automation may also axe jobs, further dampening consumer demand—a concern echoed in a Drum Tower podcast interview by The Economist. Will this unease shape broader sentiment?

What the Data Says

Petrochemical spreads—like polyethylene (PE) prices over naphtha costs—underscore the malaise. From January-February 2025, China’s CFR PE spreads averaged $294/tonne, inching to $300/tonne post-NPC. Yet, these pale against the $536/tonne average in 2021, before the Evergrande crisis. Since 2022, spreads have stagnated, reflecting oversupply tied to weaker-than-expected consumption growth (1-4% vs. the 6-8% once forecast). Margins tell a bleaker tale: Northeast Asia’s PE margins averaged $462/tonne during the 2014-2021 Chemicals Supercycle but just $7/tonne from 2022 to mid-March 2025, often dipping negative.

Conclusion: Can Stimulus Save the Day?

In the short term, markets may rally—tech stocks could climb, and chemicals might see a bump. Lower rates and a bigger deficit could lift some sectors. But the long-term outlook remains grim:

Without radical reforms—higher wages, a robust safety net, and a pivot from investment-driven growth—China’s recovery will stall. More stimulus may come in 2025, but it won’t deliver the transformation needed. Disagree? Let’s debate. The real test lies in whether PE spreads and margins rebound over the next 12-18 months. For further information on how to get involved or learn more about the report's findings, contact Tradeasia International for insights and support.

Inspired by : ICIS News with Title "China stimulus : short-term benefits versus long-term challenges"